Privilege granted to existing shareholders of a corporation to subscribe to shares of a new issue of common stock before it is offered to the public; better known simply as a right. Such a right, which normally has a life of two to four weeks, is freely transferable and entitles the holder to buy the new common stock below the Public Offering Price. While in most cases one existing share entitles the stockholder to one right, the number of rights needed to buy a share of a new issue (called the subscription ratio) varies and is determined by a company in advance of an offering. To subscribe, the holder sends or delivers to the company or its agent the required number of rights plus the dollar price of the new shares.
Rights are sometimes granted to comply with state laws that guarantee the shareholders' Preemptive Right-their right to maintain a proportionate share of ownership. It is common practice, however, for corporations to grant rights even when not required by law; protecting shareholders from the effects of Dilution is seen simply as good business.
The actual certificate representing the subscription is technically called a Subscription Warrant, giving rise to some confusion. The term subscription warrant, or simply warrant, is commonly understood in a related but different sense-as a separate entity with a longer life than a right-maybe 5, 10, or 20 years or even perpetual-and with a Subscription Price higher at the time of issue than the Market Value of the common stock.
Subscription rights are offered to shareholders in what is called a Rights Offering usually handled by underwriters under a Standby Commitment.